TacBright Optronics Corp.'s (GTSM:6434) Fundamentals Look Pretty Strong: Could The Market Be Wrong About The Stock?

TacBright Optronics (GTSM:6434) has had a rough three months with its share price down 6.8%. However, stock prices are usually driven by a company’s financials over the long term, which in this case look pretty respectable. Specifically, we decided to study TacBright Optronics' ROE in this article.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. Put another way, it reveals the company's success at turning shareholder investments into profits.

Check out our latest analysis for TacBright Optronics

How To Calculate Return On Equity?

Return on equity can be calculated by using the formula:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for TacBright Optronics is:

0.6% = NT$14m ÷ NT$2.4b (Based on the trailing twelve months to June 2020).

The 'return' refers to a company's earnings over the last year. That means that for every NT$1 worth of shareholders' equity, the company generated NT$0.01 in profit.

What Has ROE Got To Do With Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

A Side By Side comparison of TacBright Optronics' Earnings Growth And 0.6% ROE

It is quite clear that TacBright Optronics' ROE is rather low. Even when compared to the industry average of 7.7%, the ROE figure is pretty disappointing. However, we we're pleasantly surprised to see that TacBright Optronics grew its net income at a significant rate of 39% in the last five years. Therefore, there could be other reasons behind this growth. For instance, the company has a low payout ratio or is being managed efficiently.

Next, on comparing with the industry net income growth, we found that TacBright Optronics' growth is quite high when compared to the industry average growth of 0.9% in the same period, which is great to see.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). Doing so will help them establish if the stock's future looks promising or ominous. Is TacBright Optronics fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is TacBright Optronics Making Efficient Use Of Its Profits?

Summary

In total, it does look like TacBright Optronics has some positive aspects to its business. Despite its low rate of return, the fact that the company reinvests a very high portion of its profits into its business, no doubt contributed to its high earnings growth. While we won't completely dismiss the company, what we would do, is try to ascertain how risky the business is to make a more informed decision around the company. To know the 2 risks we have identified for TacBright Optronics visit our risks dashboard for free.

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This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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